Hey Guys,
I hope you are all having a wonderful week. It’s been bloody wet here in West Wales, so I’ve been quite a sedentary boy.
It was a rather undramatic week up until today, when my brother came home from school with his neck sideways. Apparently he pulled a muscle taking his jumper off, but the teachers couldn’t believe anyone could injure themselves from such a simple action, so they wouldn’t let him go home. The poor kid spent 5 hours walking around with his neck at about 45 degrees and wasn’t actually able to eat lunch as it was too painful. We’ve given him the high quality treatment of a croissant and jam, so he should be ripe as rain in a few days.
I thought I’d mix it up in this edition and start with a small beginner’s section. The content is useful for everyone, and it should be possible to understand without much prior knowledge. The podcast included in this section, is one of the best I’ve heard in a while, and I urge you all to listen to it. It’s funny, clear and extraordinarily insightful.
This edition has turned out to be a lengthy boy, so I’ve included some little numbers and a contents table if you wish to skip sections.
As always, if you can think of anyone who would find this useful, please share this newsletter with them, using this juicy button:
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Also, just a heads up, I’ve heard a few people mention that they couldn’t find the newsletter as it ended up in spam.
Contents:
Beginners Section - Must listen podcast!
The Fed Trilemma
Why Bitcoin is Digital Property
Bitcoin - Why the Economy Matters
Bitcoin Price
News Highlights
Book Recommendation
Video Recommendation
1. Beginners Section
A good place to start, for any crypto newcomer, would be in understanding how Bitcoin actually works. Bitcoin is the cryptocurrency that kicked off this whole technological revolution and remains the king to this day. Many other digital assets have been born since the birth of bitcoin, with many new use cases and ideas, however none have solidified their niche in the market better than Bitcoin.
The following video by 3Blue1Brown does a truly excellent job of explaining how the technical side of Bitcoin works and is a must watch for everyone. It is very dense, so you may need to rewatch it a few times.
Now you have an idea of how Bitcoin works, what’s the point? This is a big question and there’s no better place to start than by listening to Jack Mallers, the founder and CEO of Strike, a payment app. Strike uses the lightning network, which is a layer built on top of Bitcoin that allows for instant, crazy cheap transactions.
If you’re going to do anything this week, do yourself a favour and give this a listen. Even Jeff Bezos wants to hear what he has to say…
And if you need anymore reason to want to leave the Fiat system, here’s a word from the Federal Reserve President of Kansas City:
2. The Fed Trilemma
The fed currently has a lot on their plate and these charts from Lyn Alden explain it beautifully.
Inflation is sky high and interest rates are almost non-existent.
Interes rates are the furthest behind inflation than they have been since 1951. The latest CPI reading was 7.5% and the effective federal funds rates is still at 0.08%. This means that real interest rates (taking inflation into account) are well into the negative.
So why don’t they just raise interest rates a lot?
Because the government debt as a percentage of GDP is around 125%
In blue line, you can see the debt as a percentage of GDP and in orange you have the real interest rates of T-bill (short term bonds). When the debt is this high relative to a countries GDP, they can’t afford to raise interest rates considerably, because the cost of paying the interest would be so high. You can think of GDP as a countries income, and when their debt is so high (relative to GDP), the country can’t afford to raise interest rates, because the cost of servicing the debt would put too high a burden on the income.
A study by Hirschman Capital noted that out of 51 cases of govt debt breaking above 130% of GDP since 1800, 50 governments have defaulted. The only exception, so far, is Japan, which is the largest creditor nation in the world.
Now you may be wondering how a country can default, if it can print it’s own money to pay off the debt?
Well, it doesn’t default in the classic sense, where a country becomes insolvent, instead they rely on inflation slowly devaluing the debt. In effect, cash and bond holders end up bailing them out unknowingly. This is called ‘financial repression’. It’s when real inflation runs higher than interest rates, so by holding cash or bonds you are losing purchasing power, and the debt is slowly inflated away.
Imagine you have £10,000 in debt in 2021 and you have 30 years to pay it off. You work in a cafe that pays you £10 an hour, so in total, you’re going to have to work 1000 hours to pay off the debt (we’ll assume interest rates are 0 for this example). Inflation has been running quite high, at an average annual rate of 5%. By 2031 the total inflation will be 62.9%! Your £10,000 debt is now worth only £6140 in 2021 terms. Let’s assume you work at a cafe and their wages have kept up with inflation. You’re still getting paid £10 an hour in 2021 terms, but in 2031, that is £16.29 an hour. It would now only take 614 hours, to pay off your debt, as opposed to 1000 in 2021!
This is essentially what the federal government is doing. It costs people more money to hold the government debt than it does for the government to be in debt, because inflation is higher than interest rates. If you are a bond holder in this environment, you are basically paying to hold their debt…
Below is a 2015 paper which was written and produced for the IMF detailing this process. Here is the abstract:
High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or below market real interest rates. After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. Financial repression is most successful in liquidating debt when accompanied by inflation. For the advanced economies, real interest rates were negative ½ of the time during 1945–1980. Average annual interest expense savings for a 12—country sample range from about 1 to 5 percent of GDP for the full 1945–1980 period. We suggest that, once again, financial repression may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.
It is literally just a ‘tool’. Those who hold cash and bonds lose money. Those who hold hard assets maintain/gain money.
‘We suggest that, once again, financial repression may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.’
The third problem the fed faces is:
Raising interest rates in a slowing economic period.
‘The Purchasing Managers Index’ is a leading indicator for the health of the economy. It has peaked and is currently falling, which indicates a slow down in economic growth.
Raising interest rates slows economic growth, whilst decreasing interest rates boosts economic growth, as it makes it cheaper to borrow money. Ray Dalio has an excellent video on the entire economic machine:
The Fed is being pressured to raise interest rates in order to try and control inflation yet raising interest rates too much also risks slowing down the economy too much and entering into recession.
They are very much stuck between a rock and a hard place. In this hard place it is the cash and bond holders who are paying.
Luckily, there is an alternative system starting to rise, where there is no central authority that controls its monetary policy! This brings me on to the next topic:
3. Why Bitcoin is Digital Property
I’ve recently been working my way through an online economics course and found quite a few interesting concepts which directly relate to the properties of Bitcoin. One of which, is ‘the idea of property and property rights.
Property is anything that can be owned. It can be something physical like gold, cars, houses, guinea pigs etc, or it can be intellectual like copyrights and patents.
Something that can be owned, can also be sold, so that the ownership of that good is transferred to the buyer. This creates a market.
Someone who wants a house can go to the market and buy a house from someone who wants to sell one. Instead of one person having to build their own house, grow their own food, get their own water, hunt their own meat and bake their own bread, they can go to a market, where buyers meet sellers, and transfer goods.
But what happens if you're trying to sell your house, and someone comes up to you and says that you have no proof the house is yours, because there is no proof that your grandfather bought the house from his grandmother some 80 years ago. Then, another person turns up. This man has a shotgun, and says the house is in fact his and if you don’t give it to him, he will shoot you.
To top it all off, the ruler of your country has decided that he no longer likes people with red hair and deems it illegal. Through some government surveillance, he finds out you are one of the few red heads (who haven’t dyed their hair) in your country, and decides to take your property and all of your assets. Luckily you manage to escape, but now you only have the golden ring your mother gave you, and some cash.
Your bank account has been closed down and you never managed to sell your house. Now you must join a refugee camp with the other red heads, instead of being able to rent a small flat with your savings and investments (that you have been building up for the last 10 years) and start looking for a new job.
This is where property rights step in. Property rights give the owner or right holder, the ability to do with the property what they choose. That includes holding on to it, selling or renting it out for profit, or transferring it to another party.
We take this for granted in the West, but in some developing countries they are not so lucky.
For most of us, when someone claims it is their house not yours, you can prove to them with the right documents. When someone turns up with a shotgun, you call the police, and you can take the man to court. The man gets convicted and now people with shotguns realise they can’t just take people’s property and, for the most part, everyone lives in peace.
Clearly, property rights and ownership are important. So what are the 3 fundamental requirements for good ownership?
Exclusivity: What you own must be exclusive to you. Only you can use it unless you give someone else permission.
Enforceable: You must be able to enforce the rules of exclusivity. You should be able to call law enforcers, if someone is using your property without your permission and they should be punished or warned not to do it again.
Transferrable: You need to be able to transfer this ownership so that a market can exist. Otherwise, there would be no market.
And this brings us back to Bitcoin.
Bitcoin is so exclusive, that no one else can ‘use’ your Bitcoin even if they wanted to. This takes away a big need for enforceability because only you can use your Bitcoin. Only you have access to your wallet, and because every transaction in Bitcoin’s history is stored on the blockchain, it’s obvious who owns what. However, laws still play a part, because someone could try and torture you for your private keys, but that’s a matter outside of property rights.
Lastly, transferability.
Monetary value and property have never in history been so transferrable than with Bitcoin. You could transfer the value of 10 houses 3 times around the world to every single member of your family (if they have a wallet - as they should have…!) at the speed of light and for a small fee. As soon as those Bitcoin’s reach the wallets of your family, they now have complete ownership, and the proof is in the blockchain. Magic.
One problem that the property rights don’t solve, is the banishment of red heads. What if the people who enforce the property rights are the ones who want to take your property?
Up until recently there has never really been a solution to this problem. No asset is completely unseizable. Gold can be stolen, and it was even made illegal to hold back in 1930s in the US.
However, a new kid has turned up on the block, and I think we both know who it is…
P.S. A real life example of why Bitcoin is so important just happened today:
With no need for court orders, banks can freeze personal accounts of anyone linked with the protests.
This is a G7 country…
It’s going to be interesting to see how this all play out when there is a clear solution to this problem, which the protesters are already using, as their GoFundMe page was shut down so instead, they fundraised with Bitcoin.
4. Bitcoin - Why the Economy Matters
Bitcoin is regarded today as a risk-on asset, although many Bitcoiners, me included, see it as a risk-off asset. This is because Bitcoin is the hardest and most secure money in history. There will never be more than 21 million, and it is decentralised and unseizable. However, the majority of the world is yet to see it this way, and due to its nascence, it is still very volatile. Therefore understandably, most people still view it as a risky and speculative asset.
The nature of an asset which is viewed as risky, is that people tend to buy it when the economy is doing well, and when it is very cheap to borrow money - low interest rates.
Right now, we are very much in a risk-off environment, where risky assets don’t tend to do well. The Fed is expected to increase interest rates and slow down the printing of money, economic growth is slowing down, and there is risk of war.
So what does this mean for Bitcoin?
Let’s look to the past, and then think a bit about the supply and demand dynamics that govern Bitcoin’s price.
What you see here is the Bitcoin price in black, the Purchasing Managers Index (PMI) and I’ve noted the ‘halvings’ in red. I won’t go into detail of the PMI, but essentially, when it is above 50 (the blue line) the economy is growing, and when it is below 50 it is contracting. When the PMI is in an uptrend, the economy can be thought of as accelerating, and vice versa.
What we see is that all previous bull runs, aside from the one following Bitcoin inception (2011), have occurred during an accelerating economic environment.
Now I know what you are going to say: Bitcoin bull runs are caused by the Bitcoin halving (when the amount of Bitcoin you get from mining is halved). This is definitely partly true, but there are two sides to price appreciation: supply and demand.
When the halving event occurs, the amount of Bitcoin which is being created and issued to miners is halved. This causes a supply shock - all of a sudden there are a lot less Bitcoin available and entering the network. Compile this with accelerating economic growth, where people are more inclined to take on risk and buy a speculative asset, and you get a bull run. It’s actually quite weird how closely the bottoms of the PMI have coincided with Bitcoin halving’s.
And this kind of makes sense. You probably aren’t going to get a flood of new investors piling into a very volatile asset if everyone is scared about a recession, and wants to put their money somewhere ‘safe’.
So why are some people still very bullish now? Economic growth is slowing, interest rates look to be raised, and there is no halving for about another 2 years??
Well, there is another side to the supply, which is people’s willingness to sell their Bitcoin. Considering about 90% of the supply has already been mined, this is arguably an even more important factor than the halving.
Currently the supply side is extremely low. This can be deciphered by looking at a number of metrics, the most obvious one is the illiquid supply.
The illiquid supply has now fully recovered from its May sell off, and is climbing up at a rapid rate:
To get an idea of just how quickly this is going up, @therationalroot posted a great chart. This basically shows that for the first time in Bitcoin history, the rate at which the illiquid supply is increasing (more coins being bought by entities unlikely to sell), is greater than the amount of Bitcoin being added to the supply from mining.
On top of this, many miners are not selling either:
This is partly because they now have access to more funding, due to many of them going public on stock exchanges, and greater institutional interest, so they can now afford to Hodl their coins instead of needing to sell them.
Another supply side metric is the Dormancy Flow, which is a function of how many coins are being moved and how long they’ve been held for. The lower it is, the higher the levels of hodling. Every time it has dropped into the green area, it has marked near the bottom of each bear market. It is currently the 4th lowest it has ever been.
There are other indicators, but I think you get the gist. Supply is very tight, but the demand is lacking. Bitcoin is never going to go parabolic purely on the back of people who are already in Bitcoin, buying more Bitcoin. New money needs to enter the space for the next big run to occur, and although some of that is coming in at the moment, it’s unlikely to come flooding in, until the macro picture looks more bullish for risk-on assets, or everyone suddenly realises Bitcoin is the hardest money in existence! There are other factors that can increase demand, like more countries making it legal tender, or a company like Apple coming out and saying they have bought Bitcoin or are integrating it into their iPhone, but I don’t think these alone are enough for a long sustained uptrend.
Conclusion:
Supply is tight but demand is missing. As Lyn Alden put it, think of what we are seeing now as kindling being laid down for a fire. Everyday, when someone who doesn’t want Bitcoin, sells it to someone who wants to hold it for the long-term, another piece of kindling gets placed. Right now the macroeconomic environment is raining down on this little pile of kindling, but more pieces of kindling keep getting placed there anyway. The longer it takes for the rain to stop, the more kindling there will be. Eventually, the rain will stop, the sun will come out and the kindling will dry. Then a small spark will come and land on this huge pile of kindling. I think you know what happens next.
I don’t know about you, but I plan to keep dollar cost averaging with a 2-5 year view in mind. Every week I treat my future self, by buying a little bit more Bitcoin. I hope you do too.
5. Bitcoin Price
Bitcoin has actually done something in the last few weeks, it did in fact front run the $30k area, to find a local bottom at $33k, instead of crashing down as many expected. It’s broken out from its trendline and the $40k level, and has made a higher high.
So far, so bullish. Zooming into the 4 hour we have managed to break above all key moving averages, which indicates we could be seeing a bit of an uptrend coming up, but there is still a lot of resistance ahead.
On the macro, we are still quite simply in a range from $30k - $60k and nothing has changed.
We are still in a risk-off environment, and another leg down in stocks would most likely bring Bitcoin down with it. No one really knows what is going to happen in the short term, so you are best off sticking to a strategy that doesn’t depend on it.
I’ll end this section with a little word from Benjamin Cowen:
In the 2019 bear market (the second half of 2019) we had multiple pumps and sell-offs before we actually had the pump that took us out of the mess. I always recommend operating with a large degree of skepticism in this asset class. I basically just assume that the market is constantly trying to trick me so it's better for me to just keep my head down and follow the same strategy over and over.
6. News Highlights
Once again, a lot has been going on in the world of crypto. Most recently, the Super Bowl has been going on and crypto companies have been dominating the adverts.
Coinbase went for an alternative approach and they simply featured a bouncing QR code.
The App went from 186th place to 2nd on the App Store following the add. However, their website couldn’t handle the traffic lol.
Competing against Coinbase was FTX, and in all fairness their ad is brilliant…
But in more serious news…
Russia Decides to Treat Crypto’s as Regular Currencies a Few Weeks After Proposing to Ban Them
This is a huge move from Russia as they do a full U-turn on their previous proposal of banning all cryptocurrencies. It’s especially interesting because most were expecting to copy the example of their ally in the east, China. I think countries are starting to realise that when you ‘ban’ crypto, you simply ban yourself from crypto.
One of the ‘Big 4’ Accounting Firms Adds BTC and ETH to its Treasury
KPMG is one of the largest accounting firms in the world, with an annual revenue of $30B, and their Canadian branch has just decided to invest in BTC and ETH. In their words:
‘This investment reflects our belief that institutional adoption of cryptoassets and blockchain technology will continue to grow and become a regular part of the asset mix.’
BlackRock to Offer Bitcoin and Crypto Services
For those who don’t know, BlackRock is the largest asset manager in the world. They manage around $9.5 Trillion assets. This really sets the precedent for other asset managers to do the same.
All of this reminds me of a video I watched a while ago:
We’re seeing those first brave followers starting to come out and join publicly. Pretty soon the crowd will follow, and we get to watch it all happen.
Don’t wait for the crowd.
$4 Billion Bitcoin Hack Unravelled - A Strange Story
This is an excellent thread about the recent news on the 2016 Bitcoin hack. The stolen Bitcoin has been seized, but the convicts are very unusual. Enjoy.
Oh and Binance is now one of the top 2 biggest owners of Forbes…
6. Book Recommendation:
The Almanack of Naval Ravikant by Eric Jorgenson
Naval Ravikant is a serial entrepreneur and investor. He grew up in a poor single-parented family and his first job was with an illegal catering company in the back of a van delivering Indian food when he was fifteen.
He went on to co-found AngelList and is an early investor in over 200 companies including Uber, Twitter, Wish.com, Notion, Clubhouse, Stack Overflow, Bolt and OpenDNS.
To top it off, he seems pretty happy, and shares his thoughts on philosophy, business and investing in his podcast.
I was born poor and miserable. I’m now pretty well-off, and I’m very happy. I worked at those.
I’ve learned a few things, and some principles. I try to lay them out in a timeless manner, where you can figure it out for yourself. Because at the end of the day, I can’t quite teach anything. I can only inspire you and maybe give you a few hooks so you can remember.
This book is a culmination of Navals own words over the past decade from Twitter, blog posts, and podcasts. It’s free to download online or a physical copy can be bought on Amazon.
In the author’s words:
I created this book as a public service. Tweets, podcasts, and interviews quickly get buried and lost. Knowledge this valuable deserves a more permanent, accessible format. That is my mission with this book.
I know it says in small print, ‘A guide to wealth and happiness’, which is just the kind of book you may have reservations in picking up - ‘money is bad so why would I want it? I’m already happy, and happiness can’t be learnt anyway.’ - But I urge you to drop these prejudices and give this excellent ‘life book’ a go.
7. Video Recommendation:
Bitcoin for Corporations 2022 featuring Michael Saylor, Jack Dorsey, Lyn Alden and more
I recommend watching Jack Dorsey’s and Lyn Alden section. Lyn Alden is one of my favourite analysts and Jack Dorsey is just an amazing guy doing some amazing things.
As always, thank you for reading and I hope you have a lovely week!
All the best,
Tats
Library
Let me know if I forgot any other words or abbreviations and I'll include them next week.
Bullish - Causing, expecting, or characterized by rising stock market prices.
Bearish - Causing, expecting, or characterized by falling stock market prices.
Bear Trap - Tricking everyone that price is going to break down, before moving up.
Bull Trap - Tricking everyone that price is going to break up, before crashing down.
DCA - Dollar Cost Average. Investing incrementally on fixed schedule.
DEX - Decentralised exchange.
EMA - Exponential moving average
ETF - Exchange traded fund. A type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can.
Fed - The Federal Reserve, central banking system of the US.
Fiat Currency - Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver.
FOMC - The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System.
Fractal - Repeating patterns from the past.
HODL - To hold your coins and not sell them despite crashes in price.
MA - Moving average.
S/R - Support/Resistance level.
Whale - A very large holder of Bitcoin
Very cool and informative Episode! Sorry to hear about your bro :( hope he gets better soon. Really interesting about the Canadian prime minister, I skipped over that part of the news that last few week but have just read up on it. To be able to freeze the bank accounts of your civilians to prevent disturbance to the wider community is a very difficult situation. Apparently, his father did it too in WWII. https://www.aljazeera.com/news/2022/2/14/trudeau-invokes-emergency-powers-in-response-to-trucker-protests. What I cannot believe is the way major companies and now economies (like Russia ! WTF!) are adopting the system. Incredible. I am still getting to grips with your graphs and the easing myself out of the beginners section, but I love each one of your posts and I am learning so much. Al